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Derivatives
 6 Months Ended
Jun. 30, 2011
Derivatives  
Derivatives

(13) Derivatives

     On July 28, 2009, the Company entered into a two-year agreement on crude oil pricing applicable to a specified number of barrels of oil that then constituted approximately two-thirds of the Company's daily production. Due to increased production levels, as well as a drop in the specified monthly barrels from 9,500 to 7,375 in 2011, this number of barrels constituted less than half of the Company's average daily production for the quarter ended June 30, 2011. As of August 1, 2011 the "costless collar" agreement has expired, however, the Company entered into an alternative hedging arrangement described below.

     This "costless collar" agreement was effective beginning August 1, 2009 and has a $60.00 per barrel floor and $81.50 per barrel cap on a volume of 9,500 barrels per month during the period from August 1, 2009 through December 31, 2010, and 7,375 barrels per month from January 1 through July 31, 2011. The prices referenced in this agreement are WTI NYMEX.

While the agreement is based on WTI NYMEX prices, the Company receives a price based on Kansas Common plus bonus, which results in a price approximately $7 per barrel less than current WTI NYMEX prices.

     Under the "costless collar" agreement, no payment would be made or received by the Company, as long as the settlement price is between the floor price and cap price ("within the collar"). However, if the settlement price is above the cap, the Company would be required to pay the counterparty an amount equal to the excess of the settlement price over the cap times the monthly volumes hedged. If the settlement price is below the floor, the counterparty would be required to pay the Company the deficit of the settlement price below the floor times the monthly volumes hedged.

     On June 27, 2011 the Company entered into an agreement with Cargill, Incorporated for the period from August 1, 2011 through December 31, 2012 ("Cargill Agreement"). The agreement provides to the Company a $65 per barrel floor on a stated quantity of 10,000 barrels per month, which is approximately half of the Company's current production of oil. If the average price falls below $65 per barrel, then Cargill will pay to the Company the difference between $65 and the lower average price for 10,000 barrels per month in each month during when such lower average prices occur. However, unlike the "costless collar" arrangement, the Company will not have a price cap on any portion of its production volumes. The cost to the Company was $2.20 per barrel per month or a total of $374,000 for the entire period of the agreement.

     These agreements were primarily intended to help maintain and stabilize cash flow from operations if lower oil prices return. If lower oil prices return, the Cargill Agreement may allow the Company to maintain production levels of crude oil by enabling the Company to perform some ongoing polymer or other workover treatments on then existing producing wells in Kansas.

     As of June 30, 2011, the Company's open forward positions on the outstanding "costless collar" agreement with Macquarie Bank Limited ("Macquarie"), and our open positions on our outstanding "put" agreements with Cargill, were as follows (fair value is based on methodology described in footnote 12 Fair Value Measurement):

              Fair Value at  
Period Monthly Volume Total Volume   Floor/Cap NYMEX     June 30, 2011  
  Oil (Bbls) Oil (Bbls)   $ per Bbl     (in thousands)  
 
3rd Qtr 2011 1 7,375 7,375 $ 60.00-$81.50   $ (104 )
3rd Qtr 2011 10,000 20,000 $ 65.00 -N/A $ 1  
4th Qtr 2011 10,000 30,000 $ 65.00 -N/A $ 13  
1st Qtr 2012 10,000 30,000 $ 65.00 -N/A $ 27  
2nd Qtr 2013 10,000 30,000 $ 65.00 -N/A $ 49  

 

1 This represents the last month of the "costless collar" agreement with Macquarie.

3rd Qtr 2013 10,000 30,000 $ 65.00 -N/A $ 65  
4th Qtr 2013 10,000 30,000 $ 65.00 -N/A $ 75  
            $ 126  
 
        Current Asset   $ 90  
        Current Liability   $ (104 )
        Non Current Asset   $ 140  

 

     Management has engaged Risked Revenue Energy Associates to perform an independent valuation of the Fair Value of the Company's open forward positions. The Company records changes in the unrealized derivative asset or liability as a "Gain (loss) on derivatives" in the Consolidated Statements of Operations.

     The following settlement payments were made by the Company related to production months in 2011 (in thousands):

    Payments Production Month Payment Month
 
  $ 59.6 January 2011 February 2011
    60.8 February 2011 March 2011
    158.4 March 2011 April 2011
    210.5 April 2011 May 2011
    146.4 May 2011 June 2011
    109.1 June 2011 July 2011
 
Total $ 744.8    

 

These realized losses were recorded as a "Gain (loss) on derivatives" in the Consolidated Statements of Operation.